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Was Lehman Just A ‘symptom’?

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It didn’t take long after Lehman Brothers collapsed for the consensus to emerge: Many on Wall Street, in politics and from academia came to agree that the United States government made a grave mistake in not rescuing the firm — a mistake that put the global financial system on the brink of failure.

But Nouriel Roubini, one of the few economists to give an early warning that a financial catastrophe was coming, suggests this theory is a bit too pat. In a CNBC interview on Monday, one year after Lehman was put into bankruptcy protection, Mr. Roubini said that a financial crisis was inevitable whether or not Lehman had been saved. (Watch the video below.)

“Saying if the Fed bailed out Lehman everything would have been okay is just nonsense,†Mr. Roubini, a professor at New York University’s Stern School of Business, said on CNBC, adding that many people seem not to understand “the difference between cause and effect.â€

To be fair, many critics of the decision to let Lehman fail aren’t saying it caused the meltdown; they generally believe it made it a lot worse. And it is hard to deny that, at least in the initial days after Lehman went under, many markets seized up as unnerved investors ran for cover.

But Mr. Roubini contends that other factors — such as a housing and economic recession, failing mortgage lenders and hundreds of billions of dollars in toxic assets held by banks — were already in place by the time Lehman failed. These problems, he suggests, were the fundamental drivers of the crisis, and not the demise of a single Wall Street bank.

In Monday’s interview, he called Lehman a “symptom†of these problems.

Interestingly, that’s the same word used a few months ago by Henry Paulson Jr., who was Treasury secretary when Lehman was allowed to fail and has been widely criticized since then.

In a May interview with Newsweek, Mr. Paulson said it was “absolutely a fiction that Lehman was anything more than a symptom.â€

Trying to save the entire banking system is futile.

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The one sensible thing TPTB have done has become a scapegoat.


Today’s news about Lehman Brothers seems likely to hit stock markets hard enough to send my portfolio firmly into the red. No, I don’t have stock in or near Lehman or its peers, but the expectation is that there will be substantial collateral damage throughout the world’s stockmarkets, including those stocks I do hold.

Why am I happy to make such losses?

Well for one thing, there’s no reason they should be sustained. They won’t vanish as quickly as the surreal gains that followed news of the fannie/freddie bailouts (gains of 10-15% in UK bank shares on Monday didn’t even last the week). But neither do they reflect on the fundamental value of unconnected businesses.

More importantly, the end of the bottomless taxpayer purse is long overdue. The US allowing Lehman to fail is moving on from its King Canute phase to face reality (and so close to an election, they must expect it to be popular – or at least less unpopular than another bailout). The UK is showing signs of doing likewise, with Mervyn King reportedly taking a stand against throwing ever more taxpayers money into the black hole of housing. In the meantime both countries have suffered huge losses, but better late than never.

This weekend seems to bring us much closer to drawing a line under “housing rescue†schemes that serve only to prolong the pain. The Vested Interests can stop talking the market up[1], and start telling vendors to drop 60% from peak prices if they’re serious about selling. When a £200K house has fallen to £80K we’ll be back to something like the long-term average in terms of income multiples. Then I’ll be able to afford a house, and those stockmarket losses will cease to matter.

[1] Mainstream predictions – coming from vested interests – started this year at about +1%, moved to -10% in six months, and are now moving to -25% and more amongst those who need buyers as well as sellers. All in an effort to convince people like me to start buying at prices that are still a long way above their long-term trend, in the expectation they won’t fall very much further.

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